What’s a solar lease or PPA?

Solar leases and Power-Purchase Agreements (PPAs) are basically ways to get solar power for your home without having to buy the panels yourself. Instead, a company installs solar panels on your home’s roof, and then either leases the system to you (for a set monthly cost) or sells the electricity to you (for a set price per kilowatt-hour).

Collectively known as “third-party ownership,” solar leases and PPAs can be a great way to start generating your own clean energy without spending thousands of dollars up front!

Solar options in the green states

If you live in a green state, congratulations! $0-down solar is likely available in your neighborhood. Click on your state to go to your a special page with information about the policy and incentives that make it so great, or just connect to a solar expert in your area to learn more!

The reason these states are so good for third-party ownership is the great policy and incentives they’ve put in place to make sure solar is a good investment. And that means getting a lease or PPA isn’t always the best way to go solar. You can save even more if you pay cash or get a low-interest solar loan. Skip the middle man and become a solar owner!

Solar options in the grey states

Like we said above, the best states have laws like Renewable Portfolio Standards and Net Metering to encourage rooftop solar and make sure you get full credit for the energy your panels produce. Many of the grey states above are missing one or both of these laws, which makes the economics of solar a little more difficult for third-party owners.

Even in these states, you might still find some good financial incentives to help you take thousands off the cost. And you can still pay cash for a solar panel system, or in many cases get a low-interest loan that pays itself back over time with the electricity savings. Click your state to find out more, or connect with a solar expert in your area to see what options are available to you.

Solar options in the red states

Is your state red? Ouch. Some states have laws that prohibit third-party ownership of solar systems. This usually means homeowners have to finance the cost of solar themselves, although there are often great $0-down loan options available. Solar loans are offered by many of the biggest installers and banks all over the country, so click your state, read about the options you have, and get excited about saving money with solar!

Solar Leases vs. PPAs

Solar leases are an older form of 3rd-party ownership. Under a lease, you pay a fixed monthly payment for the privilege of having panels installed on your house, and whatever electricity the panels produce goes to offset your electricity bills.

But PPAs are now the preferred way to do 3rd-party solar, because under a PPA you only pay for exactly the electricity produced. That’s good because solar panels deteriorate by tiny amounts over time. By year 20, you’ll probably be getting only 80-85% of the electricity you did at the start.

With a PPA, you’ll only be paying for the energy produced, while with a lease, you’d be making the full payment, but getting less electricity.

Because PPAs are the more common way to get $0-down solar, we’ll cover them more extensively here:

Are solar PPAs worth it?

Solar companies across the country make big promises about their solar PPAs (Power Purchase Agreements). It’s not uncommon to see ads like “Go solar for $0-down and save!”

But what’s behind those claims? Are solar PPAs a good deal, or are you better off owning solar panels yourself? The answers to those questions can depend on where you live and what you hope to get out of using solar power.

Solar PPA Rates Per kWh

As of 2017, the average PPA price in the United States is $.11/kWh, while the average price of electricity in states that allow PPAs is about $.15/kWh.

PPA rates vary by state, because of different laws and incentives that determine how much a solar company has to pay to install the system.

PPAs are designed to save you money right away. Sometimes, that could be as little as a penny per kilowatt-hour, but hey, at least it’s something. As the cost of electricity from the utility goes up, the PPA should save you more.

How much can you save with a solar lease or PPA?

So here’s how it works: you agree to a 20- or 25-year lease with a solar installation company, you get panels on your home with no money down, then you pay the company a monthly lease payment that is less than your monthly electric bill savings. That’s huge! Lease customers around the country save an average of about $35 per month on their energy bills with a solar lease. Here’s how the numbers break down:

With a lease:
If your average monthly bill is about $160 before you get solar panels on your house, a typical 5-kW solar system might save you about half, depending on where in the country you live. The lease payments on that system will be about $45, which means your overall savings are still about $35 per month! Over 25 years, considering the way electric companies typically raise rates, you’ll save almost $11,000 on electricity costs. That’s HUGE!

With a PPA:
PPA Prices tend to start out significantly lower than the retail cost of electricity. Your installer will work with you to design a system that can meet your needs. If you can replace all the electricity you use with solar, you’re looking at a savings of about $35-$40 per month, just like a lease.

Unlike a lease, the cost of a PPA usually rises by about 2-3% per year, to keep pace with the cost of retail electricity. This is where you’ve got to be careful. Although retail prices have traditionally risen by about 3.5% per year, try to get a PPA with a lower annual increase.

The PPA Escalator

No, this isn’t a solar-powered moving staircase, it’s an annual increase in the cost of the PPA. The cost of the electricity from a PPA generally increases between 0% and 3%, depending on whether you put any money down up front.

Solar installation companies generally say the Escalator exists to keep pace with inflation and the cost of upkeep. Paying a little up front now could save you increases in the long term, but depending on how much the up-front payment is, it might not be worth it.

Here’s how the PPA escalator is designed to work, and still keep you saving money:

Keep in mind, the best way to find out what rate you can get on a solar PPA is to sign up for a solar quote and see for yourself.

Solar PPA Pros and Cons

Advantages of solar PPAs:

The installation company owns the panels and performs all maintenance

PPAs often come with performance guarantees, so you’ll know exactly how much energy you’ll generate

The price of electricity from a PPA is designed to be cheaper than electricity from the utility company

The contract stipulates exactly how much you’ll pay for the electricity, so you can plan for the future

A PPA is transferable to the next owner of your home

Of course, some of those advantages can be disadvantages, and there are some other concerns, too. The big problem with solar PPAs is that they’re not available everywhere. You can see on the map above how that might affect your chance to get solar with a PPA.

Other possible cons of a solar PPA:

Because you don’t own the panels, you won’t be able to take advantage of tax credits and other state solar incentives

If electricity prices from the utility don’t increase by the expected rate, the PPA could have you over-paying for solar in the future

When you sell your home, buyers may not want a house with a PPA contract as part of the deal, especially if the cost has risen above retail energy rates

What to Look For in a Solar PPA

Here are the essential parts of a PPA:

Contract term: This should be between 20 and 25 years.

Rate: the price per kWh of electricity. Make sure your rate is lower than your current electricity price from the utility company.

Escalator: how much your rate goes up each year. Ideally, this should be as small as possible, but never more than 2.9%.

Production: how much of your electricity bill the PPA will offset. The annual production of the system should not be more than your past usage.

Performance Guarantee: the least amount of electricity the system will produce. Make sure you have a performance guarantee in the contract, so if something goes wrong, you can hold the PPA company accountable.

Maintenance: A PPA should include full maintenance for the life of the system. Remember, you won’t own the panels, so the company should be responsible for all maintenance

Insurance Requirements: Some states have laws that require additional homeowner’s insurance if you have solar panels. Your contract should tell you if this is the case.

Solar PPAs vs. Purchasing

In most cases, purchasing a solar system is preferable to having someone else sell you its energy. When you purchase a solar system for your home, you get the benefits of the federal solar tax credit and any solar incentives your state might have.

On the other hand, if you don’t have the income to make the tax credit work for you, a PPA can be a great way to get the financial and environmental benefits of solar without the up-front cost or tax hassle.

Still, there are some states where the benefits of ownership are negligible, even if you do have the tax appetite to take advantage of the credit.

States where a PPA is as good or better than owning

When we do financial calculations, we assume a few things about the future marketplace. Here’s a quick list:

Electricity price increase per year: 3.5%

PPA price increase per year: 3%

Solar panel degradation rate per year: 0.7%

Interest rate for solar loan: 4.5%

NPV Discount rate (growth rate of best available alternative – we use the S&P 500): 7%

With those numbers in place, we compare solar loans vs. PPAs vs. outright purchases. One state that shows an interesting trend is Michigan:

Between those two charts, you can see that even though a solar PPA has the lowest total returns over time, the fact that the other kinds of solar investments require big cash payments and delay returns for years means the Net Present Value of the PPA is actually greater.

Other states where the NPV of a PPA is close to or better than that of owning include:

Solar Power Rocks has been referenced by:

Solar Power Rocks provides free comprehensive guides to solar policy and incentives for all 50 states and the District of Columbia, along with hundreds of helpful and informative articles about recent solar news and general information related to home solar power. For media inquiries, general questions, or to report an error, you can reach us here.